Last month we discussed several key points that are economically challenging commercial real estate. From the August newsletter:
Recession? Possibly. Today, let's just highlight the challenges that we are currently facing in the Commercial Real Estate investment front.
Rising interest rates
Rising interest cap insurance rates
Rising capitalization rates
Rising property insurance rates
Rising property tax rates
Debt default is on the rise
Rising vacancy rates (office sector)
Today, let's talk about consumer debt and consumer savings. These are important metrics that help to illustrate where the dollars are going and the true health of our economy. Since the pandemic of 2020, savings among Americans has dropped significantly and credit card debt and auto loans have hit record highs. Recent data from the US Bureau of Economic Analysis shows the country's savings rate has remained historically low and continuing to slide down while at the same time loan defaults continue to rise. The idea that many people might be struggling with their finances is backed up by the fact that credit card debt has passed $1T. This could mean that consumers are actively using their credit cards to navigate costs associated with inflation. To boot, the average credit card interest rate has risen to it's highest in history.
Commercial Real Estate.
The foreclosures continue to mount up. Just this month we've seen office buildings fall at record clips. Even giant Blackstone has turned in the keys to several of their office buildings. Could the office sector bring down the economy in the way consumer mortgages did in 2008? Last week, a 2019-built office building next to Penn Station in NYC sold for $16M at a foreclosure auction... just a fraction of the $90M it took to build it! Big cities are the first dominoes to fall. Office buildings in Chicago, Denver, Philadelphia and San Francisco are driving defaults. Chicago alone tops the list for troubled loans at 23%, with Denver at 19%. Overall, defaults have risen to 6.8% last month, up from 4.5% a year earlier. The office sector represents 13% of the $4.5T commercial debt market (CMBS). Interestingly, the hotel sector had been the strongest of the Commercial Real Estate assets coming out of the 2020 Pandemic. However, even hotels are beginning to default. For instance, in Houston, the hotel delinquency rate hit 56%! We are still analyzing all this data and making educated decision on our existing portfolios and upcoming opportunities. For now, we will continue to present the data to you, our partners, so that we could collectively prepare to succeed regardless of market volatility or cycle.
In closing.
In closing, as investors, it is important for us to remain true to the fundamentals. One simple fundamental is to increase risk during up-cycles and to decrease risk into capital preservation during down-cycles. Commercial real estate is continuing to shake and the headwinds are strong. However, as a mentor of mine always tells me, "there is cash in chaos if you could find the opportunities within the noise." This is where Ten15 Capital is positioning ourselves, to not only weather the storm, but to find asymmetrical opportunities to preserve and grow our wealth in uncertain times.
This is our opportunity!
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